Guest Post: Which Factors Influence Website Value?

Guest Post: Which Factors Influence Website Value?

Today’s blog post is by Mark Collier of DropMining.com. I love his insights into Flippa’s sales data, and hope you appreciate it as well!

Over the last several months I’ve been busy annoying the Flippa tech team gathering data on over 6,500 Flippa sales as part of a comprehensive study to determine what influences the value of a website and it’s sale price on Flippa.

My core goal was to develop a reliable website valuation model but additionally I wanted to delve into the data and answer some of the questions you might have about website flipping and selling on Flippa in general.

Note: this study was independent of Flippa, in fact they weren’t even aware I was conducting it and thus all findings are my own.

I looked at 52 potential influencers of a website’s sale price; mostly the data Flippa provides with their listings as well as some of my own.

I used a statistical analysis technique known as multiple linear regression to determine which of the 52 metrics of a website’s value are statistically significant influencers and which aren’t important.

The key thing to remember about regression is that it isolates each influencer and determines what the increase in a website’s sale price would be if you increased that influencer by one unit e.g. adding $1 to monthly net profit without changing any other metrics for example by cutting costs will likely increase the sale price of your listing by $3.50

I’ve summarized the major findings from the study below, you can find the full version on my blog.

Stay focused

It’s pretty easy to buy into a lot of the hype regarding what you can do to a website to make it more valuable.

But a lot of it is just that – hype.

Only 18 of the 52 metrics often used to measure a website’s value are actually statistically significant influencers.

That means that if you spend time and money improving on the other 34 metrics you will likely see no increase in your listing’s sale price.

Take a look at the below graph which shows the importance of the most influential metrics.

Importance is measured through a combination of both the amount a one unit increase will cause the sale price to rise by and the how what scale the metric can be increased to.

For example many Flippa upgrades cause a pretty large increase in sale price, but with many of them you can only buy them once thus their impact on sale price per unit increase might be quite large but the data only shows that metric as having a range of did or didn’t buy.

But while a one dollar increase in monthly profit might not have a massive increase in the sale price, it’s one of the most important metrics because profit can be virtually infinite.

Revenue, profit and traffic are clearly the most important factors influencing the sale price.

Holding everything else constant each dollar increase in monthly revenue and profit will yield a $2 and $3.50 increase in the site’s value respectively.

In practice often two metrics work together, for example a $1 increase in revenue may also lead to a $0.75 increase in net monthly profit thus having a double effect.

Or the number of inbound links to a website may increase the site’s traffic, which increases revenue which in turn increases profit, having a quadruple effect.

If you’re flipping a website, your sole focus should be to increase traffic, revenue and profits in a sustainable manner but with immediate effects.

Any actions that fulfill these criteria will have the maximum positive impact on your listing’s sale price.

Easy wins

I get really excited when data can find clear cut answers to people’s questions.

Let’s have a quick-fire round:

Verified traffic

Taking advantage of Flippa’s feature allowing you to directly link your Google Analytics account to your Flippa listing is likely to increase the sale price of your website by $630.

Interestingly uploading Google Analytics PDFs of your traffic has little or no effect on a listing’s sale price.

Upgrades

While I didn’t have sufficient data to study all of Flippa’s upgrades I did study their screenshot, bold, highlighted and premium upgrades.

Each of the first three upgrades which cost $20, $5 and $10 respectively will likely increase the sale price of your listing by over $500.

While the data is less clear whether using the three in combination will be as effective due to the large margin of error I can highly recommend using each of these Flippa upgrades for what will be an easy win.

Very few people use the $250 premium website listing and as such the data is insufficient to render a concrete judgement, but nonetheless from the available data I would estimate that this upgrade will likely add between $6,500 and $10,000 to the sale price of a listing.

These were probably to two most interesting areas in the study but I also analysed the importance of domains, what listing types do best and more.

Mark Collier is the founder of DropMining.com, a soon to be launched start-up in the expiring domain space, offering premium data on 200,000 daily expiring domains. You can catch more of his data based posts on his blog

You’ve been selling websites, but what are the tax implications?

You’ve been selling websites, but what are the tax implications?

It’s a trendy topic as Tax Day in the US approaches: how much do you owe the tax man?

Did you sell a website (or many sites!) in the last 12 months? Congratulations! Did you consider the tax implications of selling that site? Not quite? I didn’t think so. Selling a site is exciting; calculating what portion of that sale, if any, goes to the government isn’t nearly as much fun.

Determining the true tax implications of selling a website is no easy task. Tax laws don’t specifically call out the process for web sales, and accountants generally don’t agree on the right tactics either. There is, however, some relative agreement about what kind of tax you’ll pay, and to what extent.

The first question most of us ask is whether or not the revenue from selling an online business or website is considered ordinary income, or a capital gain. Websites are tricky business because it’s hard to determine if they are considered tangible or intangible goods. On one hand, they can be considered an asset: they’re owned by a business, and they generate revenue. If you hold that asset longer than one year, it will likely be considered a long term capital gain. But websites often include copyrights, which are specially excluded from capital gain treatment.

When you sell a site, the sale includes a domain, the website’s code, brand reputation and goodwill, databases, customer lists, and image assets. So how do we accurately determine how to classify the sale, and the related tax?

Is a Website a Tangible Good?

First, we need to know how to classify a website in the eyes of the IRS. A general description of something tangible is: “Having physical existence and/or form, or discernible through one or more senses.” This seems to indicate that one does not need to be able to touch and feel something in order to consider it tangible; it must only be perceived by at least one sense. A website has images and words with which to view, and many have audible components as well.

Consequently, we can deduct that more often than not, the tax you pay for selling a website will be considered a capital gain. In this sense, websites are a lot like real estate. If your business is all about buying and selling websites, then sales are simply considered ordinary revenue. For most of us, however, this will not apply.

Determining Your Basis

In order to determine the capital gain tax you will pay, you must first determine your basis. The basis equals the amount you put into any asset – in this case, your website – and the capital gain equals the difference between your sale price and the basis. If you bought the site, your basis is the sale price (setting aside depreciation). If you produced the website yourself from scratch, you must show the expenses associated with the production, and those are then added to the final basis.

As you calculate your basis, consider all costs associated with producing the website that aren’t counted as ordinary business expenses or income. Any wages you paid to yourself will not be included in the capital gain, but remember that capital gain taxes are generally lower than ordinary income, so factor this carefully. Things like the yearly domain registration costs, hosting, brokerage or listing fees to make a sale on sites like Flippa, and related costs are considered ordinary business expenses.

How to Factor Income

As mentioned above, any income you made by creating the website has to be used to adjust the capital gain tax. If your site did not generate any income, there is no effect on the capital gain. If you did produce the site, assign a standard hourly rate, and include only your expenses, not what income the site generated.

The site’s revenues are considered the ordinary income of the business, and are taxed separately as such. Show all costs involved, including salaries, equipment, software licenses, domain names, and related purchases.

The revenue and profit from the site is used to dictate the sale price. The capital gain, which equals the difference between development cost and the selling price, is what is actually taxed. As you determine the development cost, don’t forget to include the initial development, as well as any sequential version updates and improvements.

To learn more, visit the capital gain and losses section of the IRS website. Website sales aren’t explicitly mentioned, but it should give you a good idea of what to expect. Regardless of how well you understand this process, you’ll definitely want to connect with a CPA or tax professional to ensure you’re following the latest tax laws to the letter. As you are surely aware, tax rules change regularly, and especially in a relatively new frontier like website sales, changes are all the more frequent.

Photo Credit: 401(k) 2013

What’s The Real Value of Facebook Likes and Twitter Followers?

What’s The Real Value of Facebook Likes and Twitter Followers?

Should you pay more for a website with scads of followers? Let’s investigate.

You never know who’s on the other side of the keyboard…

If you’re in the market for a website purchase, perusing the available choices at Flippa shows a broad spectrum of social media fans for each listing. There’s a justified heavy emphasis on the value of an active audience for sites these days, but do fan numbers alone indicate a true following? In other words, how much is a Facebook or Twitter fan really worth, dollar-wise, to the valuation of a website?

While it’s impossible to completely quantify a Facebook or Twitter follower, there is some prevailing common sense as to what they are intrinsically worth. It stands to reason that a site with a large fan base is worth more than one without, but it’s more important to evaluate the actual loyalty and activity of followers than their simple presence.

What Our Users Think

A recent poll of Flippa users on our Facebook page confirmed this logic. Almost every visitor that responded indicated that followers are only valuable if they are actually active on the site. With such a high volume of fake followers being purchased these days, this is a fair judgment. So why aren’t fake followers actually valuable?

As with many topics in our culture, quantity is often perceived as more valuable than quality with social media followers. When it comes to social media followers, this is simply wrong. Sites that buy volumes of fake Facebook and Twitter fans usually don’t see the windfall they are expecting from this apparent quick fix. Fake followers are just that – fake. They won’t engage with your content, they won’t assist in spiking traffic, and they surely won’t purchase anything from your business — all in all, they add up to a vanity metric. In the end, more followers won’t necessarily increase your bottom line.

Downsides all around

In fact, buying fake followers can actually put a site’s real followers at risk. The services that sell followers don’t often come with a stellar reputation, and hacks, viruses and spam are not uncommon from these lists. This means your loyal fan base could get clobbered with unwanted spams if you purchase fans, thereby alienating what loyalty you did have.

These days, it’s easier than ever for folks to know when new followers have been falsely added. With tools like Twitter Counter, anyone can track when a site has had an unusual burst of fans. Just ask Mitt Romney – during the recent presidential campaign, the press annihilated him when his count went up more than 116,000 followers in a single day. If it looks suspicious, that’s enough to tarnish your reputation for good.

Take The Time to Investigate

So how can you tell if a site’s Facebook and/or Twitter fans are legit? Besides using Twitter Counter to monitor activity, ensure the traffic analytics of the site you are considering match up with the apparent fan base. For example, if a site has 100k Facebook fans, but only a few hundred uniques each week, it’s clear that at the very least, the fans aren’t engaging with the offered content. Overall, analytics tell the story you need to read, not social media fan numbers.

Don’t just pay attention to Facebook and Twitter numbers either. Depending on the niche of your business, LinkedIn numbers are also valuable. LinkedIn has a higher perceived value than other sites because of the activity the average LinkedIn user exhibits. As one of our poll user’s pointed out, purchasing a site with 20k LinkedIn Group members is far more valuable than 20k Twitter followers, because you can mass mail these members, and count on them for a much higher engagement. It’s a far more targeted demographic, and that means more to your bottom line.

As you’re looking through the hundreds of sites up for sale on Flippa, you’ll need to dig deeper into the added value a site’s listed social media followers actually brings. The numbers alone don’t tell you what you need to know. Remembering that quantity is not quality, dig deep into a business’s traffic and follower loyalty before you place a value on their fan base. Find out where and when these members were added, and you’ll be able to accurately determine what, if anything, the lists are worth to the business’s final valuation.

It’s not about how many people are following you, it’s about how engaged they are with your business and content. And above all, don’t plan on purchasing a site and then purchasing your fans – it just doesn’t add up to success. If your site doesn’t come with a ready-made user base, develop a savvy social marketing plan and intend to add followers the old-fashioned way – by earning them.

Photo Credit: mastrobiggo

How To Buy a Company at a Bargain Price

How To Buy a Company at a Bargain Price

About 75% of US-based startups fail. Scary statistic, right? If you’re struggling with your own upstart, it is — but if you’re an investor looking to pick up a small company for a bargain, a lightbulb should have lit up inside your head!

According to this fascinating post from Statistic Brain, about 50% of those failures are mostly attributed to “incompetence” — this means that the business wasn’t necessarily a bad idea, it just wasn’t executed very well. A bit of extra knowledge and experience might be all that’s needed to revive it.

Ready… set…

With that in mind, there are four things that must be prepared before you launch yourself into full renovation mode:

  • Execution Plan – Once you purchase the site, how will you bring it to new heights? Do you have an advertising plan, a new monetization method in mind, or a content strategy? Be clear on what you’ll do from the first day the site is in your possession.

  • Financials – What is your budget for the purchase? Do you have operational funds on hand for the first months of your business? While many small companies already have some form of monthly revenue, it may not be enough to turn a profit in early days.

  • Advisors – If the company previously failed because of a lack of knowledge and experience, you’ll need to build yourself a team to tackle the new challenges ahead. Do you have a web developer on hand? What about a legal advisor? Without having these experts on staff, it’s important to know ahead of time who you’ll call in a time of need.

  • Competition – Competition is a good sign. It means there is demand for the products and services provided by this company. What’s important is knowing your competitors, monitoring their next moves, and finding the gaps in their offerings.

 

Finding the Gems 

Not all failing companies are worth buying. A huge advantage of using Flippa to find your next business is that our powerful search options enable you to find sites you’ll want to bid on, then set up a saved search to receive new results directly to your inbox.

Here’s an example of a saved search that helps uncover potential winners: sites established between 12 and 24 months ago, with a PageRank of at least 1, with a minimum of monthly traffic and a small amount in monthly revenue. 

You can set up your own search, with your own criteria, at flippa.com/search.

 

Bidding Wars

 Have you ever become involved in a bidding war for a small website with heaps of potential? That’s because you weren’t the only one who saw a bright future for the site, once provided with care and investment. 

Being the first one to find a failing business on Flippa gives you a chance to negotiate with the seller for a Buy It Now price. If you’re afraid that others will discover the listing and offer more than you can afford, make the seller an offer to end the listing right away. The lure of quick money is often enough to convince a seller to sell you the site without waiting for the end of the auction.

Time to Get Serious About Analytics

We get it: for most people, reviewing their analytics is about as much fun as a trip to the dentist. Building a conversion funnel is probably low on your priority list (below, say, building your email list, conducting A/B tests and increasing your keyword rankings). We’re all busy, and there are only so many hours in the day.

Guess who does have time to dive deep into their site’s analytics? Everyone else who is vying for your customers’ attention, that’s who.

It’s time to take a good, honest look at what you’re doing, analytics-wise, and decide whether or not it’s working for you.

You’re So Vain

Aah, vanity metrics. It’s fun to compare page views, keyword rankings, social media followers and email open rates, but what do these numbers really tell you? Do they necessarily affect your bottom line? What about tracking conversion rates, conversions per keyword, active social media users, and email click-through rates instead?

Focusing on what’s easy to track means you may be missing some major issues with your sites — and some huge opportunities.

 

Calculate the ROI on your analytics time

Still need some convincing before you buckle down and track the numbers? Avinash Kaushik, author of Web Analytics 2.0: The Art of Online Accountability and Science of Customer Centricity has some great tips on calculating the ROI of time spent on analytics.

With the huge availability of data from so many sources (Google, Facebook, email campaigns and now even Pinterest), it’s worth learning how to find the information that will propel your sites to the next level.

 

What about you?

Which metrics do you track? Do you care about Facebook fans, or are you more concerned with conversions and traffic sources? We’d love to hear more about it in the comments.